Pricing of Corruption Risk - U.S. Case Study for the Municipal Bond Market

Abstract

Existing research suggests a positive relationship between corruption and bond yields. However, previous studies have overlooked two crucial aspects: the incomplete decomposition of pricing factors and the need for examining corruption at more localized levels, considering the decentralization of political power. This study investigates the extent to which municipal bonds price in corruption risk in the United States. Specifically, we examine the relationship between the corruption measure (Convictions per Capita) and annualized issuance cost, which comprises the yield to maturity and annualized gross spread—representing the sum of the cost of debt and the search costs incurred by underwriters. Our findings reveal a positive and significant association between annualized issuance costs and our corruption measure. Robustness checks largely support these results but also emphasize the necessity of conducting investigations over an extended period and utilizing multiple corruption measures to provide more comprehensive evidence.

Keywords: Corruption – Municipal Bonds – Bond Yield – Annualized Issuance Costs – Gross Spread